U.S. Fast-Food Giant Yum Bids for Chinese Chain

HONG KONG — Yum Brands, the company behind KFC, Taco Bell and Pizza Hut, is planning to add another name to its list of restaurant chains: Little Sheep, which operates hundreds of colorful hot pot restaurants throughout China.

Based in Louisville, Ky., Yum has been betting on China’s giant population and rising affluence levels since 1987, when it first introduced the KFC brand in China. Last year alone, it opened more than 500 restaurants in mainland China and now generates more than one-third of its annual revenue in the country.

On Friday, Yum stepped up its expansion drive with a bid for Little Sheep, which is based in the Inner Mongolian city of Baotou and operates what is a well recognized brand within the highly fragmented Chinese restaurant market.

Yum, which already owns 27.2 percent of the Hong Kong-listed Little Sheep, offered to pay 6.50 Hong Kong dollars, or 84 U.S. cents, each for most of the shares it does not already own, with the aim of raising its stake to 93.2 percent. The offer, which had been signaled in late April, values the company at $682 million.

The founders of Little Sheep -- Zhang Gang, who is also chairman of the company, and Chen Hongkai -- would retain the remaining 6.8 percent.

“The restaurant industry in China is highly competitive, but we are optimistic about the outlook and the opportunities,” Sam Su, chairman and chief executive of Yum’s China division, said in a statement Friday announcing the planned transaction. “We are confident we can further strengthen Little Sheep’s brand, business model and market position in the industry.”

The transaction, which remains subject to regulatory approval, underlines the eagerness of many Western retailers and consumer goods companies to expand into China.

Disposable incomes have risen rapidly in China and in many other developing Asian nations over the past two decades, prompting an influx of companies wishing to sell products as diverse as luxury handbags and cars, chicken drumsticks and laundry detergent.

Yum was a relatively early entrant to the Chinese market, and KFC has become one of the most dominant and visible fast-food chains in China — more so than rivals like McDonald’s.

There are now more than 3,200 KFC outlets in more than 700 mainland Chinese cities, according to Yum. The Pizza Hut brand, which was introduced in China in 1990, now counts 520 restaurants and 120 home delivery outlets across this market of 1.3 billion people.

Yum also pledged to help Little Sheep, which listed on the Hong Kong stock exchange in 2008, to introduce the hot pot concept — customers dip vegetables or meat into boiling broth at their tables — and the Little Sheep brand “to a wider global audience.”

“I believe that the strong capability and expertise Yum possesses in managing world-class brands and growing restaurant networks will significantly further Little Sheep’s development in China and overseas,” Mr. Zhang of Little Sheep said in the statement Friday, “and should leave us well positioned to develop into an internationally recognized restaurant chain.”

A version of this article appears in print on May 14, 2011, on page B2 of the New York edition with the headline: Yum Brands Bids for Chinese Food Chain. Order Reprints|Today's Paper|Subscribe